Bankrupt and imprisoned, Revolutionary War financier Robert Morris was instrumental in the commencement of bankruptcy law in the United States. Currently, the U.S. Bankruptcy Code appears to have stagnated, despite bipartisan calls for reform after nearly two decades of minimal action.
Lawmakers on Capitol Hill are seizing the opportunity created by high-profile, large-scale bankruptcies to introduce amendments to the code. Notably, a bipartisan group from both chambers introduced parallel legislation in July to curb the contentious asset-separation tactic known as the Texas Two-Step. This legislative effort follows Johnson & Johnson’s use of the maneuver to fend off mass litigation alleging its talc-based products caused cancer (Bloomberg Law).
However, given the current political climate, pushing such opaque issues to the forefront of a deadlocked Congress during an election year is an arduous task. Rep. Emilia Sykes (D-Ohio), who introduced the Texas Two-Step legislation in the House, acknowledges the complexity: “Unfortunately, it has not been a particularly productive Congress. On top of that, many members are not well versed in bankruptcy law.”
Despite these challenges, there appears to be a cross-party consensus on the importance of fairness, consumer protection, and access to justice regarding these amendments. Sykes is optimistic that the legislation will pass, pointing out that the conversation extends beyond partisan politics and deeply affects communities nationwide.
In addition to the Texas Two-Step legislation, Democrats from both chambers have introduced two other bills in an effort to amend the bankruptcy code to prioritize patient care during health-care bankruptcies and to limit protections for non-bankrupt entities. This legislative push follows a historical pattern where major changes in bankruptcy law often emerge during periods of significant financial and societal pressure.
One such historical moment came in the early 19th century after financier Robert Morris’s imprisonment for debt prompted Congress to pass the first bankruptcy law in 1800. This law experienced several iterations over the years, culminating in the Bankruptcy Reform Act of 1978, which comprehensively overhauled the system and established bankruptcy courts in each district. Bipartisan cooperation in subsequent decades further refined the structure, such as the creation of Chapter 12 for farmers and fishermen in the 1980s.
However, the momentum for substantial changes has significantly slowed, with the last major overhaul happening in 2005 through the Bankruptcy Abuse Prevention and Consumer Protection Act. This act aimed to make it more difficult to file for Chapter 7 bankruptcy amidst concerns of system abuse by individual filers, a concern now rising about corporate entities.
Recent legislative efforts are partly spurred by perceived abuses of the bankruptcy system by large corporations. In response to the U.S. Supreme Court’s June ruling in the Purdue Pharma case, Rep. Jerrold Nadler (D-N.Y.) reintroduced a bill (H.R. 9223) to extend the ban on nonconsensual liability releases.
Sen. Edward Markey (D-Mass.) also introduced a bill (S. 4804) to ensure that bankruptcy plans give substantial weight to maintaining health care access. This follows the controversial bankruptcy of Steward Health Care System, which has drawn significant scrutiny for its private equity involvement and impact on patient care.
The fluctuating nature of corporate bankruptcy usage suggests there is considerable room for development in the code. Whether current legislative efforts will lead to substantial reforms remains to be seen, but history shows that significant changes in bankruptcy law often come during times of increased pressure and scrutiny.
Link to the full article: Ghosts of Bankruptcy’s Past Haunt Bills to Address J&J, Purdue